By Allen Guelzo, Princeton University
The principal legal function of the Second Bank of the United States was to serve as the official bank of deposit for all federal government funds. But, the provisions of its charter in 1816 told another tale. The charter actually gave it the potential to turn into the kind of aggressive and functional central bank for the entire American economy that the National Republicans were yearning for.
Efforts to Regulate Money
Very quickly, the Second Bank of the United States found two major ways to flex some serious economic muscle. The first of these was by regulating the money supply. Since all federal customs duties and federal taxes were payable to the Bank of the United States as the government’s bank of deposit, a constant flow of locally issued bank notes came into the Bank of the United States.
The Bank of the United States then had the authority to present these bank notes paid by people who owed taxes or customs duties. These bank notes would then be presented by the Bank of the United States to their original issuers, the local banks who had originally issued these paper bank notes. These banks would be throughout the country, and the Bank of the United States could then turn to them and demand repayment in hard coin or specie.
Consequences of Specie Payments
Now, the constant and regular demand of the Bank of the United States for specie payments by all these local banks that had issued the bank notes was an important restraint on those banks because, otherwise, those banks would be tempted to print bank notes all out of proportion to the actual sums of specie that they held in their vaults.
The constant threat that the bank would demand specie payments to back up those paper bank notes always made local banks careful to have sufficient specie on hand to satisfy the Bank of the United States.
Gaining Control
In this way, the Bank of the United States really controlled the growth of the American economy. In times of prosperity, the demand for specie could keep banks from overextending themselves through excessive loans and excessive issues of paper currency.
In harder economic times, the bank could ease the strain by relaxing its demands for specie from the local banks, and allowing local banks to loan money more freely and perhaps at lesser interest rates than otherwise.
The Strange Mix of Public and Private
The second function that the Bank of the United States performed concerned national investment, because the bank’s charter gave it important economic clout. The Bank of the United States was a peculiar organization, in that it was a mixed public and private enterprise.
The bank’s charter had planned to found the Second Bank of the United States on a capitalization of $35 million, but the federal government was only capable of contributing one-fifth of that capitalization. The rest had to be raised by selling shares in the bank to private investors.
Therefore, even though the Second Bank of the United States was primarily the federal government’s bank of deposit, and paid the federal government interest on its deposits and dividends on its profits, private citizens could also purchase shares in the bank and sit on its board of directors.
This meant that the bank was free not only to act as a bank of deposit for the government, but also to pursue investment policies in private corporations, and most significant of all, in financing internal improvement projects.
This is a transcript from the video series A History of the United States, 2nd Edition. Watch it now, Wondrium.
Ascension with Monetary Power
With the deposits of the federal government in its vaults, and a constant inflow of federal tax monies through its windows, the Bank of the United States had constant financial liquidity. It always had money coming in, which you could spend or invest at discretion. It also had capital reserves that dwarfed those of any other financial institution in the country.
Now, from the point of view of the Democratic-Republicans, this was precisely what was wrong with the bank. Not only did this single institution have more power than any single institution could safely be trusted with, but that power was based on money that, technically speaking, belonged to the people of the United States. There was something terribly askew in the minds of Democratic-Republicans about a bank that used the people’s money to thwart the people’s will, as expressed in Congress.
Most Powerful
Because the Bank of the United States was backed by the deposits of the federal government, and because it could demand specie in exchange for local bank notes, ordinary citizens would gradually come to treat the bank notes issued by the Bank of the United States as superior in value to those issued by the state banks, especially because Bank of the United States bank notes could be used for the payment of federal taxes.
Now, the Bank of the United States could have staved off suspicions that it was becoming a power-hungry monster if it had been better managed or if it had avoided the appearance of setting itself up as a virtual fourth branch of the government. In fact, though, it did neither.
Common Questions about the Rise to Power of the Second Bank of the United States
The constant and regular demand of the Bank of the United States for specie payments by local banks that had issued the bank notes was an important restraint on those banks because, otherwise, those banks would be tempted to print bank notes all out of proportion to the actual sums of specie that they held in their vaults.
With the deposits of the federal government in its vaults, and a constant inflow of federal tax monies through its windows, the Bank of the United States had constant financial liquidity. It also had capital reserves that dwarfed those of any other financial institution in the country.
Not only did this single institution have more power than any single institution could safely be trusted with, but that power was based on money that, technically speaking, belonged to the people of the United States.
